Credit card swipes: Here’s what to know

Swiping a credit card is a familiar part of everyday commerce. Businesses have relied on swipes for their simplicity, affordability, and out of habit, but concerns have been raised about the security of older swipe-only setups. Adopting new methods can deepen customers’ trust while also improving the checkout process.

Below, we’ll explain how credit card swipes work, why some businesses prefer them, where they fall short, and what modern upgrades can offer customers.

What’s in this article?

• How does a credit card swipe transaction work?
• What are the benefits of using swipe payments?
• What tools do businesses need to accept swipe payments?
• How does Stripe Terminal enable swipe transactions?
• What are the challenges of relying on swipe payments?
• How can businesses upgrade from swipes to EMV or contactless payments?

How does a credit card swipe transaction work?

Credit card swiping is a simple process: you swipe your card, the screen flashes “approved,” and you walk away with your purchase. Behind the scenes, it involves secure data transfer and multiple checks for fraud or other issues. In the early days of cards, it wasn’t unusual for a terminal to use a dial-up connection—you’d sometimes hear that old-school modem noise as it phoned in your transaction. Now, broadband and mobile networks make these transactions nearly instant. Here’s the process that occurs after you swipe:

• The terminal reads details from the card stripe, including the card number and expiration date.

• Those details are routed through a payment gateway to the bank that issued the card. This system asks the bank whether the card has sufficient funds and whether it should approve the purchase.

• The issuing bank checks the card status (e.g., balance, credit limit, any signs of suspicious activity) and responds with an approval or a decline. If approved, the transaction is completed and the business and customer receive confirmation.

What are the benefits of using swipe payments?

Despite some security drawbacks, swiping is part of everyday transactions around the world. Here are some reasons why shops, restaurants, and service providers use swipe payments.

It’s familiar

Swiping feels straightforward, especially in environments that cater to older cardholders or communities where chip adoption isn’t high. A familiar experience at checkout can make a meaningful difference.

The hardware is affordable

A basic magnetic stripe reader is often cheaper than readers that accept chips or are tap to pay. In some cases, you can even get a small plug-in device for a phone or tablet at a very low cost. That’s appealing if you’re a pop-up vendor or a small shop that wants to be able to quickly accept credit cards.

It works with legacy point-of-sale (POS) systems

Some businesses have older POS systems that aren’t fully updated to accept chip-based transactions. Since swiping works just fine on them, there might not seem like a pressing reason to upgrade.

It’s a useful backup method

Even if a business supports chip-based and contactless card payments, there might be times when those features fail or the card’s chip is scratched. It’s useful to have a magnetic stripe slot as a fallback in those cases.

The barrier to entry for accepting swipe payments is low, especially with a basic card reader. Small businesses such as food trucks and farmers market vendors often use these devices because they’re a convenient, portable way to accept cards. To get started with swipe payments, you just need a magnetic stripe reader, POS or payment software, a payment processor, and an internet connection or phone line. Here’s how each of these components works.

Magnetic stripe reader

This can be a countertop terminal or a small USB or audio jack device you attach to a phone or tablet. Some card readers are built to use only the magnetic stripe while others have multiple slots or the ability to accept contactless payments, which use near-field communication (NFC).

POS or payment software

This software ties the hardware to a payments platform. It logs the purchase amount, handles refunds, and transmits data to your processor. This might be a simple mobile app for a single-person venture or a full retail system that also tracks inventory and customer accounts.

Payment processor

The payment processor completes each transaction by moving it from your POS system to the card networks. Stripe is an all-in-one solution that handles processing for both online and in-person payments.

Internet connection or phone line

Swipe transactions typically require real-time authorization. If you lose signal or your line goes down, you might have to process payments offline. This risks data loss.

How does Stripe Terminal enable swipe transactions?

Stripe Terminal brings the payment capabilities of Stripe into physical retail settings. With Terminal, you can choose from hardware options that support magnetic stripe, EMV (Europay, Visa, and Mastercard) chip, or tap-based payments and integrate them using software development kits (SDKs). You can then shape the checkout flow to your exact specifications.

If you already use Stripe for online payments, Stripe Terminal makes it even easier to manage physical and online sales in one place. Data is synced across physical and digital channels, and you can manage and monitor both transaction types with the Stripe Dashboard.

Stripe Terminal also provides a foundation for upgrades. If you start out with a Terminal device that mostly accepts swipes, you can upgrade later to a chip-compatible or tap-compatible device without needing to switch providers.

What are the challenges of relying on swipe payments?

While swipe payments were a major advancement in the mid-20th century, they have notable downsides in modern commerce. Here are the main drawbacks of accepting swipe payments:

• Security: Magnetic stripe data can be copied using a hidden skimmer. If a fraudulent actor steals that data, they can produce counterfeit cards.

• Liability: Businesses that haven’t upgraded to accept cards with chips can be held liable for fraudulent transactions. That means if someone uses a cloned magnetic stripe card in a swipe transaction, the business might be held responsible.

• Wear and tear: Magnetic stripes can get scratched, and card readers can get clogged or damaged. A misread stripe slows down checkout and can frustrate customers.

• Global acceptance: The United States has recently begun to embrace contactless cards, but many other countries have used them for years. Some travelers might not even have functioning stripes on their cards.

• Limited data: Swipes don’t generate unique transaction codes like an EMV chip does. While that might not matter for routine purchases, it does reduce the overall security and traceability of transactions.

While swiping remains a useful secondary option, it’s worth considering an upgrade. Here’s how to switch to accepting EMV and contactless payments.

Choose the right hardware

Look for a device that can accept EMV chips, contactless payments, and possibly magnetic stripes as a secondary measure. Stripe Terminal offers card readers with all of these features built in.

Verify your POS software

If you’re using a POS system that was built around swiping, verify that it supports EMV or NFC. In many cases, it might require an upgrade or a plug-in. Integrating with a provider such as Stripe can keep your data consistent across channels.

Weigh your costs

Modern readers can be more expensive than basic swipe machines, but the costs of potential fraud or replacements after a data breach can be higher in the long run. Calculate your return on investment for upgrading to a new system, and ensure you consider hardware cost, potential liability, and the broader customer experience.